Creditors’ Rights 51
Q: I have a customer who has filed for bankruptcy under Chapter 11. Even though my company is a secured creditor, I have just been informed that some unsecured creditors are receiving priority payment in the bankruptcy proceedings. Isn’t this contrary to the letter and spirit of the Bankruptcy Code?
A: Some unsecured creditors are turning the neatly arranged bankruptcy rules on their head. The unsecured creditors have likely invoked the Necessity of Payment Doctrine, also called the Rule of Necessity, and been designated Critical Vendors. Critical Vendors are unsecured creditors who provide goods and services that are critical to the bankrupt business getting back on its feet. The Rule of Necessity says that because rehabilitating a struggling business is the fundamental purpose of Chapter 11, the courts can look first at which creditors are essential to the bankrupt’s business. They get paid first to avoid a disruption in service. Other creditors with greater or equal priority interest just have to wait in line and hope there is something left over for them. Therefore, it is crucial to keep tabs on bankruptcy proceedings from the start in order to protect your interests.
*Learn more about credit policies and collections with Bob Bernstein’s book, Get P.A.I.D.TM A Guide to Getting Paid Faster (and What to Do if You Don’t!) at www.getpaidsystem.com